For the last couple of years, people in the cryptocurrency community have pretty much banked on the planet’s largest money managers suddenly deciding to take up positions in Bitcoin. Despite its cypherpunk roots, it makes a lot of sense for the pension managers, fund overseers, endowment managers, and other institutions commanding huge pots of capital to want exposure to this brand-new asset. Bitcoin is, after all, not directly correlated to the performance of any other investible asset.
At its very core, Bitcoin presents a highly desirable investment proposition. It is the scarcest “thing” on the planet. Despite popular misconceptions, very little true scarcity exists in our universe. Bitcoin’s hard cap of 21 million makes it unique.
It, therefore, could one day perform a similar function as gold did in the past – a hard monetary unit that cannot be inflated by any single entity. Only it’s better than gold because its total supply is known, and its issuance rate cannot be changed. Likewise, no one is suddenly going to “find” a huge cache of Bitcoin as they might do with gold beneath the earth’s crust. This is a very powerful quality. It could one day make Bitcoin the ideal candidate to serve as the backbone of an entirely new economic system based on lasting, long-term value. However, that is a debate for another time.
Financial institutions don’t really care about wild disruption. However, they do care about making money. The very qualities that make Bitcoin a sound form of money also make it highly likely to appreciate in value. There is only one variable that needs to move in order for the Bitcoin price to shoot upwards, and that is demand. So far, natural demand (discounting unhealthy speculation at the peak of bubble periods) has been growing slowly year in year out. More businesses are accepting Bitcoin, while innovations like SegWit and Lightning Network are making Bitcoin more usable than ever before. All this combined makes Bitcoin highly investible for both retail investors and institutions.
The Institutional Money is Already Trickling in
Now that we know why the largest money managers on the planet might want to take up a position in Bitcoin, the next logical question is why the heck aren’t they here yet?
Well, the true answer is that several institutions have already invested. David Swensen, “Yale’s own Warren Buffet”, is known to have allocated capital from his institution’s endowments fund to two cryptocurrency funds. Likewise, big institutional capital is flowing into the market via over-the-counter trading desks every day.
Many in the crypto community seem to think that a massive wave of new money is going to suddenly flood the market sending the price of Bitcoin to new highs in a matter of weeks or even days. However, this is clearly not going to be the case. Those less risk-averse money managers will have already taken up positions in the digital asset. If the market does turn around, those who took on the greatest risk will also likely reap the biggest rewards.
Investing in Bitcoin now after the prolonged bear market takes courage. Only the true believers and investors with the highest appetite for risk have the faith or stomach to be putting money in when the market appears in perpetual decline.
The Infrastructure Continues to Improve
That said, for many other institutions, the infrastructure surrounding Bitcoin is still not ready to provide the kind of safeguards and insurances that they are used to when allocating capital in millions or billions. Granted, many cryptocurrency businesses have stepped up to try and lure these institutions. Yet, it seems unlikely that these businesses will suffice with the “white glove” custody offerings they have created.
Fortunately for those who feel institutional money is vital for Bitcoin’s long-term success, a number of well-known names from the world of investing start providing suitable digital asset storage for institutional clients. Fidelity Investments and the parent company of the New York Stock Exchange, the Intercontinental Exchange, will be supposedly launching custody solutions and exchange platforms for institutional clients. The ICE’s Bakkt platform is hoping to bring regulated price discovery to the market too. This is something else that has previously been lacking and that institutions are accustomed to.
Institutional Investors Aren’t So Dissimilar to Retail investors
Of course, even with the slow trickle of institutional money already making it into the cryptocurrency market and new storage options being created from massive names in investing, it is worth remembering that investors, whether institutional or retail, often behave similarly.
If you look at the Bitcoin price graph, you’ll see a pretty unappealing picture for investors. Although the fundamentals of Bitcoin – the infrastructure, the protocol itself – continue to improve, there is little to suggest to the lay investor that the optimism of 2017 will return any time soon.
People, whether operating on behalf of institutions or themselves, like to follow the crowd. They’d rather miss out on a few percentage points at the beginning of a bull run to be sure that they are getting a solid entry.
It seems likely that after the price passes the psychologically important $6,500 range, the institutional cash will pour in and boost Bitcoin to heights that only the likes of John McAfee and other hopeful Bitcoin bulls dream possible.
Disclaimer: The above article is in no way to be taken as investment advice. Always do your own research and never invest in a cryptocurrency more than you can afford to lose.